reinventing european growth
TRANSCRIPT
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1 Foreword: opportunities in adversity
2 The scorecard
4 What happened to FDI in 2008: contraction6 Contraction
10 The cratered European FDI landscape
18 Future investments: a glass half-empty
20 Confronting the FDI crisis: a European refuge22 FDI and Europe in 2009: opportunities from adversity?
27 2010 outlook
30 Longer term
34 Europes new business model: inventing growth
36 Reforms wanted39 Creative (r)evolution
40 Europes city-zen
42 Entrepreneurial and responsible government
44 Methodology
Reinventing European growth
Ernst & Youngs 2009 Europeanattractiveness survey
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Ernst & Youngs 2009 European attractiveness survey 1
The G20 spring meeting closed with promises of a more
regulated global economy. We now have a much better
picture of the factors impacting businesses around
the world: difficulty in accessing finance - despite
an unprecedented fall in indicative interest rates, slumping
demand, slowing economic growth or contraction, rising
unemployment, weak consumer confidence and falling
profits.
As a consequence, we are seeing a rise in the number of
stressed companies around the world: a record number of
companies are expected to go bankrupt in 2009. In Europe
and in the US, 260,000 business insolvencies are expected.
More companies are likely to breach their loan covenants
in 2009 as the slowdown intensifies, leading to a surge
in company restructurings or failures.
Foreign investors - companies acquiring assets and/or
expanding operations in international markets - are waiting
for the dust to settle after the demolition of financial
services on which they used to rely. They are driving blind
with no visibility on the road they used to follow. Yet 74%
of international business leaders have put their immediate
confidence in Western Europe's ability to address the
economic crisis. They'd sooner stay at home than venture
abroad. Emerging regions are not providing the absolutely
safe ground international investors are looking for.
Yet, the engine of growth in the global economy is movingeast, propelled by a combination of commodity production
and the advent of a new Asian middle class. Emerging
market multinationals are becoming global champions
in many industries. In this world in transformation, new
power brokers (sovereign wealth funds, private equity,
hedge funds) have taken off, but the financial crisis
is altering their trajectories.
In this troubled and fascinating year, Ernst & Young's 2009
European attractiveness surveyreports on the 3,718 mobile
capital investments made in 42 European countries by
multinationals, both large and small, which have created
more than 148,000 jobs. These foreign investors have
pursued locations with supply chain potential, competitive
costs and advantageous resources, attractive national
and local tax structures, business incentives and
technology clusters.
How were European countries affected by the crisis and
in which sectors ? How are business leaders looking at
Europe and other global regions to tackle the crisis?
What are their longer-term prospects - if any? What is
expected from governments, national and local, to help
businesses get through the current situation and beyond?
These issues form the core of Ernst & Young's 2009
European attractiveness survey, based on a two-fold,
original methodology that reflects, first, Europe's real
attractiveness for foreign direct investors, based on
Ernst & Young's European Investment Monitor (EIM),
and second the perceived attractiveness of Europe and its
competitors by a representative panel of 809 international
decision-makers.
In 2008, Ernst & Young took a vital step by bringing
together 60,000 people in 87 national practices acrossEurope, the Middle East and India. As we present our seventh
European attractiveness survey, we would like to extend
our gratitude to the thousands of decision-makers
and Ernst & Young professionals who have taken the time
to share their thoughts with us.
Foreword: opportunities in adversity
Patrick Gounelle
Global Managing Partner
EMEIA Integration
Marc Lhermitte
Partner
Ernst & Young Advisory
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Coping with crisis europhile
FDI market euro-check
In 2009, 42% of investors will reconsider the way they expandtheir international operations. Hit by the crisis, FDI activityin 2009 is likely to be dominated by non-cash mergers andconsolidation, as companies seek to survive economicturmoil by optimizing assets and merging activities to cutcosts. Risk management is at the top of companies locationstrategies. Investors' top priorities include: how they receiveinputs and deliver goods and services (52%), stability ofthe legal environment (49%), and labor skills (49%).
As a consequence, investors see Europe as the safer FDIdestination for the immediate future. Western and Centraland Eastern Europe lie neck-and-neck as the safer FDIdestinati, with Western Europe rising seven percentagepoints compared with 2008. Although the global economyis no longer driven by the triumvirate of Europe, the USand Japan, international investors see Europe as known,predictable and protective.
Brazil, Russia, India and China (BRICs) lose their FDI appealuntil things get better. After topping the attractivenesstable in 2008, China loses 14 points, ranking third in 2009.India is fifth, behind North America, whilst Russia and Brazil,
previously rising stars, trail in sixth and seventh places,respectively. Although entering and operating in new marketscan offer tremendous opportunities, it also brings new risksdecision-makers say they cannot currently afford.
3,718 projects
were announced in 2008,
putting an end to five yearsof sustained
inward investment growth
Western and Central and Eastern
Europe lie neck-and-neck as the
safer FDI destinations
In 2008, Europe secured as many Foreign Direct Investmentprojects as the year before, but the impact of the economiccrisis on job creation was severe. Investment announcementstotaled 3,718, nearly unchanged on 2007, ending five yearsof sustained growth. But the number of jobs created by FDIfell 16 per cent to 148,333, accelerating a downward trendunderway since 2004.
Winners: there were some winners in 2008, notably Germany,Switzerland, Sweden, Italy and Ireland. Germanys FDIupsurge was fueled by new regional headquarters for
domestic or Eastern European markets, and by industrialdemand for business services and software. Western Europealso began to see significant numbers of renewable energyprojects for the first time.
Losers: IT outsourcing, financial and logistics were earlyvictims of the downturn as their clients struggled. Theylaunched fewer new facilities in Western Europe, especiallyin the UK, France and Spain. New jobs in these top FDIsectors slumped by 23% in 2008. Eastern European countriesthat took a hit in 2008 include former FDI hotspots suchas the Czech Republic, Slovakia and Turkey where numbersfell, especially in automotive and electronics.
2 Reinventing European growth
The Scorecard
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Ernst & Youngs 2009 European attractiveness survey 33
Eureka?Seeking a newbusiness model
Post-crisis -euroskeptic
When interviewed about Europes future recovery drivers,the first response of our global panel was a non response,reflecting todays uncertainty about their markets andoutlook. A quarter of them declined to identify the mostpromising business sectors to help Europe's recovery and40% were unable to mention any opportunity for growthin this context.
In the longer-term, the economic downturn is unlikelyto keep the global center of economic gravity from movingEast. Companies from developed economies will continue
to expand in emerging markets to grow their business,improve their cost structure and/or tap skilled labor pools.Asked which will be the most attractive region over the nextthree years, our panel puts China and Central & EasternEurope in first place (52% and 51% respectively). Indiaranks third, followed by Russia and Western Europe.Brazil is in sixth position.
Europe will not remain a winner without completelyreinventing its growth strategy. A new business modelmust be found. What is needed?
Creative revolution: The promotion of innovation andmeasures in support of innovation are now at the very topof investors priorities. Twenty-five percent of respondentsmake a direct connection between European attractivenessand improvement of education in innovation-intensive sectors.The global battle for competitiveness and mastery of the
knowledge economy is growing. Demand for skills isincreasing.
Growth wanted: Our global panel believes the telecomsindustry (16%), consumer goods manufacturers (14%),and energy, environment and financial services players(11%) will help drive Europes recovery.
Europe's city-zen: European cities are a key attractivenessasset. Some of their merits are hard or expensive to imitate.Our panel is seduced by their exceptional culture andhistory (27% of respondents), international accessibility(26%) and lifestyle (25%). But Europes cities cannot rest
on their heritage and park benches. They must accommodateand become centers of innovation and ideas.
40% were unable to mention
any opportunity
for growth
25% of business leadersmake a direct connect between
attractiveness and education
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What happened
to FDI in 2008:
contraction
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In 2008, with 39% of global FDI inflows, Europe remained the number onedestination for international investment. Yet the continent was clearly hitby the crisis, receiving smaller investment projects in fewer locations. In this
section, we describe the changing patterns of FDI in Europe, in sectors andtypes of investment. We also present, based on Ernst & Young's EuropeanInvestment Monitor, the winners and losers in a troubled year.
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Reinventing European growth6
Contraction
2004 20050
1,000
2,000
3,000
4,000
2006 2007 2008
+5%
2,9103,065
3,5313,712 3,718
0%+5%
+15%
2004 20050
50,000
100,000
150,000
200,000
250,000
2006 2007 2008
-18% +10%-18%
-16%
238,051
195,821
215,037
176,551
148,333
FDI projects into Europe
Job creation by FDI in Europe
Foreign investment projects stall, job creation falls
In 2008, Europe secured 3,718 investment announcements,
four more projects than in 2007. Five years of sustained inwardinvestment growth came to an end. Despite the growing
attractiveness of more dynamic, smaller economies, Europe's
diversity and economic size had hitherto underpinned its declining
but dominant 39% share of the world's FDI inflows (in Bn$).
Europe has been hit by the economic crisis, and its prospects
of playing a leading role in a multi-polar world are in doubt
for the immediate futur.
Source: Ernst & Young European investment monitor 2009
Source: Ernst & Young European investment monitor 2009
Five years of sustained inward
investment growth came to an end
Projects were scaled back, and some were halted. But the
momentum of decisions made many months before and
the misleadingly untroubled first semester may explain why
companies made almost as many investment announcements
in 2008 as in 2007 - and more than any year before that.
But the troubled year had a severe impact on job creation. In 2008,
foreign investment led to the creation of 148,333 new jobs,
a 16% decline from 2007, reinforcing a downward trend in new
employment prevailing since 2004.
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Ernst & Youngs 2009 European attractiveness survey 7
Foreign investors are reviewing their location strategies as they
adapt to market uncertainty. Stability, predictability and quality
criteria are, more than ever, at the top of investors' immediate
concerns. Investors are giving priority to how they receive
inputs and deliver goods and services (very important for 52%
of them), the stability of the legal environment (49%), and labor
skills level (49%).
Today's uncertainty is leading companies to put risk management
at the top of their agenda (stability and predictability of their
location options). Companies operating in high-tech and business
services tend to favor quality factors such as telecommunications
infrastructure (very important to 61.5% of business-to-businessservices companies) and labor skills level (very important for
53% of them). Industrial companies are more focused on cost
efficiency: labor costs are very important for 50% of them.
Stability, predictability and quality
criteria are, more than ever,
at the top of investors'
immediate concerns
37
142
211
125
108
686
523
96
116390
145
143
176
100
48
60
87
85
63
53
1,084
984
11,397
11,403
15,512
11,659
3,660
6,709
5,626
1,918
1,547
439
1,996
3,448
3,391
5,038
6,335
20,196
12,933
12,900
Number of
projects2008
Numberof jobs
created2008
PL
CZ
HU
SK
RU
RO
BG
FR
SP
PT
IE
UK
BL
NL
SE
DE
CH
AT
DK
IT
Foreign direct investment in top 20European countries in 2008
Source: Ernst & Young European investment monitor 2009
Location strategies: low risk, low reward
Analysis of criteria used by international executives in selecting
investment locations shows 2008 decisions are dominated by
four sets of factors:
1. Getting to market: the main reason companies change
or add locations is in response to a change in their market -
its scale, place, nature or diversity. What rivals are doing,
as well as, quality and price, also matter. Location decisions
depend on proximity to markets, transport mobility and
telecommunications infrastructure.
2. Labor and productivity: companies also need physical assets
and workers. They may arbitrate between different laborprofiles. Skills, labor availability and costs are therefore
measured against productivity for the best mix.
3. Taxes and laws: these can directly or indirectly shape
the flexibility and profitability of an investment. Tax burdens
and incentives, legal and regulatory factors and public
incentives all matter.
4. Environment and region: the operating environment, and the
extent to which it offers a company the means to develop, is
important. Companies weigh up the availability of capital and
financial markets, specific expertise in a given region, the wealthof innovation and research and even the quality of life.
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Reinventing European growth8
Sector Jobs 2007 Share 2007 Jobs 2008 Share 2008 Trend 2007-2008
1 Automotive 37,229 21% 32,459 22% -13%
2 Business Services 13,201 7% 13,220 9% 0%
3 Machinery & Equipment 7,313 4% 12,611 9% 72%
4 Food 6,553 4% 8,677 6% 32%
5 Software 12,734 7% 7,364 5% -42%
6 Electrical 8,021 5% 6,303 4% -21%
7 Electronics 19,034 11% 5,569 4% -71%
8 Other Transport Services 3,272 2% 4,898 3% 50%
9 Plastic & Rubber 3,409 2% 4,854 3% 42%
10 Other Transport Equipment 2,176 1% 4,803 3% 121%
11 Pharmaceuticals 4,526 3% 4,577 3% 1%
12 Non-metallic mineral products 4,047 2% 4,327 3% 7%
13 Chemicals 2,823 2% 3,614 2% 28%
14 Fabricated Metals 3,579 2% 3,497 2% -2%
15 Retail 4,765 3% 2,809 2% -41%
16 Financial Intermediation 7,351 4% 2,637 2% -64%
17 Wood 1,848 1% 2,207 1% 19%
18 Computers 6,346 4% 2,200 1% -65%
19 Furniture & Sports Equipment 1,985 1% 2,104 1% 6%
20 Scientific Instruments 1,999 1% 1,857 1% -7%
Other 24,340 14% 17,746 12% -27%
Grand Total 176,551 100% 148,333 100% -16%
Sectors: a perfect storm
As revenues fall, operating costs soar and non-essential projects
are halted. Many companies have suspended projects linked to
market expansion and acquisitions.
Some industries have been hit by multiple shockwaves:
Automotive: demand fell, credit for sales financing andliquidity became tight. Pending 'green' cars in production,
companies are looking to optimize working capital, restructure
and survive. Yet though down 13% on 2007, almost a quarter
of new FDI jobs in Europe were in the automotive industry.
Real estate: new projects are on hold as the industry strivesto value de-valued assets.
Software: as their financial clients struggled, companiesslashed new facility projects especially in the UK, France,
Spain and Ireland.
Electrical and electronics: plans to follow automotive clientsto Poland, the Czech Republic, Hungary or Romania were
suspended.
Finance: fewer projects as banks wrestled with scarceliquidity, increased counterparty risk, and balance sheet
crises. Eastern expansion stalled, front offices in the west
were down-sized.
Many sectors also face pressure
to restructure and become
more efficient, adding to
investment activity
Source: Ernst & Young European investment monitor 2009
Job creation by FDI
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Ernst & Youngs 2009 European attractiveness survey 9
Sector Projects 2007 Share2007 Projects 2008 Share 2008 Trend 2007-2008
1 Business Services 467 13% 544 15% 16%
2 Software 474 13% 398 11% -16%
3 Machinery & Equipment 205 6% 243 7% 19%
4 Automotive 223 6% 211 6% -5%
5 Electronics 203 5% 193 5% -5%
6 Other Transport Services 177 5% 192 5% 8%
7 Financial Intermediation 235 6% 183 5% -22%
8 Chemicals 119 3% 147 4% 24%
9 Food 142 4% 145 4% 2%
10 Pharmaceuticals 122 3% 116 3% -5%
11 Electrical 117 3% 114 3% -3%12 Non-metallic mineral products 110 3% 108 3% -2%
13 Plastic & Rubber 92 2% 94 3% 2%
14 Fabricated Metals 102 3% 78 2% -24%
15 Scientific Instruments 63 2% 77 2% 22%
16 Insurance & Pension 71 2% 60 2% -15%
17 Publishing 69 2% 59 2% -14%
18 Computers 39 1% 53 1% 36%
19 Scientific Research 49 1% 52 1% 6%
20 Real Estate 51 1% 52 1% 2%
Other 582 16% 599 16% 3%
Grand Total 3,712 100% 3,718 100% 0%
Some industries are weathering recession better than others:
Machinery and equipment: a surge of projects to supply windturbines, solar components, fuel cells.
Food industry: increased capacity to serve consumer marketsin Russia and Poland.
Logistics: location, infrastructure and land availability drewnew warehouses to France and Poland.
Business services: unaffected by crisis in early 2008, trainingand education firms, online service providers and engineers
in cleantech/green tech, including Indian and Chinese
multinationals, established new sales and marketing offices
in Europe's larger cities, headed by Paris and London.
In 2008, renewable industries created industrial jobs in Europe,
and will create more. Opportunities lie within challenges. Astutebusinesses position themselves to take market share or access
new 'green' market opportunities. While many markets or
industries may experience much slower growth, or contraction,
in 2009, overall demand in sectors such as healthcare and
renewables may continue to grow. Many sectors also face
pressure to restructure and become more efficient, adding to
investment activity.
Source: Ernst & Young European investment monitor 2009
Number of FDI projects
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Reinventing European growth10
The crateredEuropean FDI
landscape
Sector 2007 2008 Trend 2007/2008
CEE 1,042 992 -5%
WE 2,670 2,726 2%
Grand Total 3,712 3,718 0%
Sector 2007 2008 Trend 2007/2008
CEE 102,910 76,419 -26%
WE 73,641 71,914 -2%
Grand T otal 176,551 148,333 -16%
Foreign investors have behaved very differently in Europe's
mature economies during 2008, from the way they have
in the continent's emerging markets. While Western Europe1
broadly maintained the number of FDI projects at the same
level as in 2007, the Eastern countries saw inward FDI projects
fall by 5%. The contrast in job creation was still more marked:
foreign investments created 26,491 fewer jobs in CEE, but
'only' 1,727 fewer new posts in the West.
Flexible social regulations, resistance in West European countries
to downsizing at large industrial plants, and a scarcity of majorinvestors have clearly had a knock-on effect on the more fragile
economies of the new Europe. German manufacturers, US IT
outsourcers, and French carmakers have all shown greater loyalty
to their countries of origin and historical markets, launching
fewer projects in emerging Europe.
FDI in Central
and Eastern Europe
created 16% fewer jobs
in 2008
Source: Ernst & Young European investment monitor 2009
Source: Ernst & Young European investment monitor 2009
Job creation
Number of FDI projects
1. Western Europe include the following countries: UK, France, Germany, Spain,Belgium, Sweden, Switzerland, The Netherlands, Ireland, Denmark, Italy,Austria, Portugal, Finland, Greece, Luxembourg, Norway ,Malta, Iceland,Monaco, Liechtenstein.Central and Eastern Europe include the following countries: Poland, Hungary,
Russia, Czech Republic, Romania, Slovakia, Bulgaria, Turkey, Serbia, Ukraine,Lithuania, Estonia, Latvia, Croatia, Slovenia, Bosnia and Herzegovina, FYROMacedonia, Albania, Belarus, Moldova, Cyprus, Montenegro.
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Orders at many industrial equipment,
automotive, building products and
construction companies in Germany
and elsewhere in Europe - are down by
40-50% from their July 2008 peaks. Many
conglomerates have yet to reveal the scale
of damage in their worst-hit divisions.
And many companies owned by private
equity are over-borrowed.
So the first thing we need is a revised
insolvency regime that will make it easier
to save distressed companies, by favoring
the survival of the company over the
interests of creditors. Otherwise it will
cost far more to rebuild these corporate
structures in the long term.
We need to use tax relief or similar
mechanisms to prime the investment pump,
for example to encourage light industry and
households, which waste a lot of energy,
to invest in more efficient motors or
insulation: these investments have a quick
payback and create demand here in Europe.
We need cultural and accounting changes,
so that instead of buying the cheapest
buildings to construct, governments buy
buildings with the lowest through-life cost,
including their energy needs for heating,
lighting and air conditioning.
Then we need to use public borrowing,
not to finance consumption, but to invest
in goods and services that will benefit
the next generation. They will have to repay
the additional debt, so this is only fair.
So we need investment and innovation
in education programs and healthcare,
and also in green technologies and
infrastructure that benefits competition
and lowers costs, like cross-border power
transmission and broadband networks.
To invent growth, we must first invent
the right kind of demand, here in Europe.
Ernst & Youngs 2009 European attractiveness survey 11
Professor Edward KrubasikCompany director and policy advisor,
past President, European EngineeringIndustries Association. Germany.
Inventingdemandgrowth
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Reinventing European growth12
Europe was able to build world class
industrial positions in the global system
for mobile communications, transportation,
and industrial equipment. This was possible
to a large extent thanks to continuous R&D
efforts and by promoting standards based
on collaboration.
Today, in a context of increasing competitivepressures on Europe, the industry landscape
is evolving rapidly: over the past few years
the hi-tech, high-value added industries
have all experienced significant shifts
in the global playing field that have
redistributed the respective roles of
world regions.
These trends are posing big challenges,
of course, but they are also generating
new opportunities that are pushing major
industrial players to redefine their
technology and business strategiesglobally. The semiconductor industry played,
and will play, a crucial role in Europes
competitiveness, enabling 80 percent
of the innovations required for advancing
a sustainable economy, while generating
10 percent of GDP downstream.
European and national authorities
increasingly realize that building on
responses to todays major societal needs
is essential for Europe to remain attractive
and to create tomorrows lead markets:
solutions for a greener environment
and energy efficiency, active safety
in automotive, intelligent parking and road
systems, and increased broadband access
to the home and on the move.
The European innovation strategy should
be built on four pillars: a robust education
system, strong R&D, lead markets and
manufacturing expertise. In addition,
Europe should implement dedicated
innovation-led measures to benefit from
those unique foundations and shape its
own future.
Denis GriotSenior Vice President & Chairman, Europe, Middle-east & Africa region,Freescale Semiconductor, Inc. A scientist by training, he personallyholds five semiconductor patents.
Inventingsustainable
growth
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Western Europe: vulnerable services, renewableindustries
Services investments in Western Europe were scaled back first,
in response to plummeting orders from manufacturers. Banks
stopped setting up call centers, software companies established
fewer program-writing centers. Growth of business services,
notably in logistics and IT outsourcing, slowed. FDI job creation
by these powerful FDI motor slumped by 23% between 2007
and 2008.
Expansion projects accounted for 51% of all jobs created by foreign
investors in Western Europe in 2008. Liebherr International AG
of Switzerland expanded crane-manufacturing operations
in Sweden, Germany and France, creating 922 posts. Indian
business services company Firstsource
Solutions Ltd extended its Northern Ireland
contact center, adding 834 staff. MicrosoftCorporation expanded massively, co-locating
R&D operations at sites across many European
countries, adding 815 jobs in total.
Western Europe began to harvest jobs from
green shoots planted by investors in
renewables. In 2008, green industries created 4,780 industrial
jobs in Western Europe. Australia's Prime Solar Pty Ltd promised
a plant making silicon wafers for photovoltaic power generation
in Germany by 2010, providing 1,060 jobs. Germany's Enercon
is hiring 800 people to make wind turbines in Portugal and France.
Ernst & Youngs 2009 European attractiveness survey 13
Source: Ernst & Young European investment monitor 2009
Sectors 2007 2008 Change
Software 9,329 5,473 -3,856
Financial intermediation 4,944 1,745 -3,199
Retail 3,275 1,254 -2,021
Automotive 6,615 5,193 -1,422
Health & Social Work 1,420 535 -885
In 2008,
renewable industries
created 4,780
industrial jobs
in Western Europe
Sectors: where jobs are missing
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Reinventing European growth14
Central and Eastern Europe: industrial asphyxia
FDI in manufacturing and logistics provided 26,491 fewer jobs
in Central and Eastern European countries in 2008.
Announcements to establish or expand regional headquarters,
call centers or shared services provided only modest comfort
in an otherwise difficult year for the new Europe.
Sectors 2007 2008 Change
Electronics 15,393 2,320 -13,073
Computers 5,911 1,390 -4,521
Automotive 30,614 27,266 -3,348
Electrical 5,620 3,195 -2,425
Textiles 2,604 900 -1,704
Foreign investors in automotive, electronics, electrical and
computer industries made many fewer commitments. The
investment shortfall in these top sectors hit countries that had
made great efforts to build infrastructure, invest in technical
training and provide incentives to Western manufacturers.
Projects in the new economies of Europe were put on hold
faster than those in US or European multinationals' home markets.
Expansion - to grow markets in Eastern Europe or add
manufacturing capacity in competitive labor pools - is less
a priority than securing the company's existing base. Potentialinvestors do not see today's circumstances as a springboard
for major expansion projects.
Source: Ernst & Young European investment monitor 2009
Source: Ernst & Young European investment monitor 2009
Business function 2007 2008 Change
Industrial f unctions 89,368 64,309 -28%
Tertiary functions 13,542 12,110 -11%
Total CEE 102,910 76,419 -26%
Job creation by business function
Sectors: where jobs are missing
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Ernst & Youngs 2009 European attractiveness survey 15
In the wake of the current global
downturn, Lithuania has moved swiftly and
decisively to reduce the tax burden for
firms investing in R&D and innovation.
In November 2008, we trebled tax write-
offs for R&D investments.
This measure bolsters an existing well-
funded R&D support program, running to2013, which features a broad package of
measures low-cost loans, venture capital
funding, export assistance, help with patent
application, and much else.
In line with our Nordic neighbors, Lithuania
is staking its future prosperity both on
home-grown innovation as well as on
the rapid adoption of advanced technology
across a host of sectors, and of course
export-oriented firms with high value-added
products and services must play a large
role in the country's economy.
Incentives to boost R&D are vital, and form
a cornerstone of Lithuania's economic
policy. We're also rolling out a broadband
Internet access program that will cover
four-fifths of the country by 2010. And we
are standing behind companies that adopt
productivity-enhancing technology across
their supply chain.
Much support is available to foreign
investors who contribute to Lithuanian
R&D and innovation.
I can say that I am not just paying lip service
to a fashionable topic: I am a physicist
by training. Concrete steps are being taken
to improve R&D infrastructure better
research laboratories, new small-business
incubators and R&D parks.
As we speak, our legislature is putting
the finishing touches on a higher education
reform bill that will make it much easier
to get public and private partnerships off
the ground and that removes bureaucratic
barriers to innovation.
Andrius KubiliusPrime Minister, Lithuania.
Inventingprosperousgrowth
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Reinventing European growth16
Country 2007 Share 2007 2008 Share 2008 Trend 2007-2008
1 United Kingdom 24,186 14% 20,196 14% -16%
2 Poland 18,399 10% 15,512 10% -16%
3 France 14,488 8% 12,933 9% -11%
4 Russia 14,934 8% 12,900 9% -14%
5 Hungary 11,104 6% 11,659 8% 5%
6 Romania 12,464 7% 11,403 8% -9%
7 Germany 5,972 3% 11,397 8% 91%
8 Bulgaria 3,096 2% 6,709 5% 117%
9 Ireland 4,052 2% 6,335 4% 56%
10 Czech Republic 15,102 9% 5,626 4% -63%
11 Spain 7,335 4% 5,038 3% -31%
12 Slovakia 8,479 5% 3,660 2% -57%
13 Portugal 4,045 2% 3,448 2% -15%14 Belgium 4,379 2% 3,391 2% -23%
15 Serbia 5,484 3% 3,063 2% -44%
Other 23,032 13% 15,063 10% -35%
Grand Total 176,551 100% 148,333 100% -16%
Country 2007 Share 2007 2008 Share 2008 Trend 2007-2008
1 United Kingdom 713 19% 686 18% -4%
2 France 541 15% 523 14% -3%3 Germany 305 8% 390 10% 28%
4 Spain 256 7% 211 6% -18%
5 Poland 146 4% 176 5% 21%
6 Romania 150 4% 145 4% -3%
7 Russia 139 4% 143 4% 3%
8 Belgium 175 5% 142 4% -19%
9 Switzerland 124 3% 125 3% 1%
10 Netherlands 123 3% 116 3% -6%
11 Ireland 80 2% 108 3% 35%
12 Hungary 135 4% 100 3% -26%
13 Italy 69 2% 96 3% 39%
14 Czech Republic 83 2% 87 2% 5%
15 Sweden 81 2% 85 2% 5%
Other 592 16% 585 16% -1%
Grand Total 3,712 100% 3,718 100% 0%
Source: Ernst & Young European investment monitor 2009
Source: Ernst & Young European investment monitor 2009
Job creation by FDI
FDI projects
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17
Country league table
There were no clear winners and no absolute losers in the 2008intra-European FDI competition. Despite the economic turmoil,
the 2008 rankings are little changed from previous years. Every
country was hit, in different ways. Each country's result has
to be measured against the average 16% fall in employment
created by FDI or stagnation of project announcements.
Countries on Europe's 2008 FDI map fell into three clear groups:
Contracting: most destinations shared proportionately in
the declining market trend. Western countries including
the UK (still the number one destination for FDI), France,
Belgium and Spain saw a decrease both in projects and
employment. All industries were hit. In CEE countries such as
Poland and Russia, foreign investors remained interested in
expanding food or automotive operations. In Hungary, there
were fewer but larger projects, a sign that foreign investors
remain confident in the long-term prospects.
Dynamic: there were positive or relatively stable trends
in Germany, Switzerland, Sweden, Italy and Ireland. Germany's
FDI upsurge was fueled by new regional headquarters for
German or Eastern European markets, and by industrial
demand for business services and software. Though Ireland
was bruised by plans to shift manufacturing jobs to more
cost-competitive countries, British and US companiescontinue to invest there (56% of new FDI jobs in 2008).
Vulnerable: former FDI hotspots such as the Czech Republic,
Slovakia or Turkey, saw numbers fall dramatically, especially
in automotive and electronics. There was little inward location
of back offices to mitigate the shortfall in manufacturing job
creation. But these activities, which were previously FDI
drivers in these destinations, are likely to resume that role
in the future.
Ernst & Youngs 2009 European attractiveness survey
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Reinventing European growth18
Futureinvestments:
a glass
half-empty
Intentions to invest or expand operationsin Europe
40%
53% Yes
7%
No
Can't say
More than half (53%) of the 809 respondents to Ernst & Young's
European attractiveness 2009 survey have no plans to expand in
Europe, up from 47% in 2008. Today, business leaders are focused
on survival and maximizing returns on existing assets. Only when
the viability of current operations is assured will they feel confident
to expand their horizons and look to enlarging the territory
in which they operate.
The proportion 'definitely not' planning expansion in Europehas risen every year since 2004 (18%), to reach 31% in 2009.
Although the creation of a single European market and the
harmonization of European prosperity remain incomplete,
many leading companies in many sectors have already achieved
the transition from national to pan-European players.
Source: Ernst & Young European investment monitor 2009
Respondents: 809 international business leaders
The proportion
'definitely not'
planning expansion
in Europe has reached
its highest level
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The world is changing faster than ever. Despite faltering trade growth,the march of globalization continues and the gulf between developed andemerging countries narrows further. The turmoil in the financial landscapeis driving increased regulation. Aging populations and the different demandsof the younger Generation Y challenge the workforce modelthat has existedfor decades. Technology continues to alter how we communicate and act.And climate change concerns challenge how businesses operate.In this section, we look at the prospects for FDI worldwide, and in Europe.We evaluate Europe's attractiveness against its global competitors, and someof the challenges looming in the years ahead.
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Confrontingthe FDI crisis:
a European refuge
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Reinventing European growth22
FDI and Europe in2009: opportunitiesfrom adversity?
Intentions to reconsider international
expansion strategy because of the crisis
42%
50%
8%
Yes
No
Can't say
Source: Ernst & Youngs 2009 European attractiveness survey
Respondents: 809 international business leaders
Economic contraction is hitting international investment flows.
In March the International Monetary Fund (IMF) revised its growth
estimates downward for 2009, predicting that global gross
domestic product (GDP) would fall by 1.3%. The eurozone
is forecasted to shrink by 4.2%, against earlier expectations of
a 2% contraction. The US is expected to contract 2.8% and Japan
by 6.2% (- 2.6% estimated in January 2009).
The two biggest Asian economies are helping cushion the world
from northern economic contraction. Though their growth
has slowed, China's GDP is forecasted to grow by 6.5% in 2009,and India's by 4.5%.
The economic crisis has led to a massive fall in the number of jobs
creates throught FDI around the globe. And FDI flows are still
slowing fast. According to estimates by the United Nations
Conference on Trade and Development (UNCTAD), global
FDI inflows fell by US $384.2 billion in 2008, a 21% fall against
2007. Developed economies are worst hit. Inflows to Europe
fell 33.7%. Inflows to emerging economies continued to grow,
but at a rate of just 3.6% in 2008 - compared with growth
of more than 20% in 2007.
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Reinventing European growth24
0% 20% 30% 40%
Western Europe
% 2008
40%
Northern America
33%
39%
China
25%
Central and Eastern Europe
20%India
16%Russia
12%Brazil
11%
9%Other Latin America
Japan
Other Asia
6%
Middle East 6%
33%
47%
42%
21%
30%
21%
10%
14%
9%
7%
10%
=
Source: Ernst & Youngs 2009 European attractiveness survey
Respondents: 809international business leaders - Total > 100% many possible answers
Short-term solution: safety in Europe
Even though the global economy is no longer driven by thetriumvirate of Europe, the US and Japan, foreign investors
are showing surprising confidence in the European eco-system.
They know it well and they know it will provide safety, for now.
Entering and operating in new markets can offer tremendous
opportunities, but it also creates risks that decision-makers
are saying they cannot currently afford.
The uncertain climate of 2009 has resulted in an extraordinary
return to favoring more familiar markets. Western as well as
Central and Eastern Europe are neck-and-neck as the safest
regions, with Western Europe rising 7 percentage points compared
with 2008. The retreat from more distant emerging markets
has not affected CEE's long-term attractiveness, but China,
which in our 2008 survey was in pole position as the most
attractive region in which to establish operations, has lost
its crown.
Most attractive regions for FDI projects
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Ernst & Youngs 2009 European attractiveness survey 25
0% 10% 20% 30% 40% 50% 60% 70% 80%
74%Securing the present
40%
Improving performance
Restructuring to meet
new conditions
Protecting current assests
37%
39%
Pursuing new market
opportunities
19%
Companies emphasis due to current downturn
Source: Ernst & Youngs Opportunities in adversity study
Respondents: 337 board executives
Stay at homes: Overall, 55% of our panel of respondents
is European, because most European FDI originates in other
European countries. And whatever their origin, 89% have
European investments. Europe already bulks large in their
investment location portfolio and they want to protect these
assets. An Ernst & Young survey on Opportunities in Adversity
released in February (2009) showed 74% of companies were
focused on securing the present and almost 37% restructuring
to meet the new, unprecedented conditions. Virtually all industries
and locations have been hit by a lack of credit, declining asset
valuations, rising defaults and industry consolidation.
China's rise to prominence in 2008 was short lived. The region
has lost 14 points in its attractiveness score in 2009, and is cited
by only 33% of respondents. India's rating has also suffered,
but fell only 10 points, less than that of China: it was the preferred
location of 20% of respondents.
China apart, this ranking of regions is broadly aligned with
those perceived as most likely to surmount the crisis effectively.
But while business decision-makers cite China as having the
greatest ability to address the crisis, our panel is significantly
more reticent about locating operations there. China now appears
to be seen more as a trading partner, with an increasingly affluent
population attractive for its purchasing power, rather than as
a business location offering cheap manual labor.
In February 2009,
74% of companies were focused
on securing the present
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Reinventing European growth26
Over the past five years, I led our drive
into Europe, which now accounts for 26-
27% of our global revenues of $4.6bn.
Europe is a significant market, which
requires dedicated focus, and we wanted
to reduce our dependency on the biggest
market, which is the US. So Europe is an
important part of our growth and our
investment in providing business andtechnology consulting, business process
outsourcing and engineering services.
Today, we have 18 offices across Europe
and three near-shore centers, in the UK,
Germany, and the Czech Republic, plus
Poland, where we have recently opened
with 800 staff.
The European market is still far from
homogenous. Entering the UK market
posed no issues, but it is only in the past
couple of years that our growth in France
and Germany has been strong.
The basic cost of living comfortably
in Europe is about 4-5 times as expensive
as compared to India and China and it is
unlikely that this gap will be closed in the
near future, despite the wage inflation
in India.
But there is always a need for technical
skills to accompany our clients,
notwithstanding some of the work is being
off-shored. The understanding of countrys
business and culture cannot be off-shored.
Thats why 80% of our investment is in hiring
talented people. In Europe, our experience
has been good in terms of finding people
with excellent skills, attitudes and business
knowledge. But in terms of scaling-up,
it is going to be challenging.
So we need to increase the intake of
students into technology services in Europe,
and ensure people are willing to be mobile,
because clients are widely distributed.
For me, the future focus has to be on skills.
B.G. SrinivasHead of Europe, Senior Vice Presidentand Head of Manufacturing, Infosys.
Inventingtalented
growth
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Ernst & Youngs 2009 European attractiveness survey 27
Confidence in the ability of these regions to address the current economic crisis
0% 10% 20% 30% 40% 50% 60% 70% 80%
Western Europe 74%
China 70%
Northern America
63%
69%
India
61%Central and Eastern Europe
61%Japan
51%Oceania
49%Brazil
48%
48%Middle East
Southeastern Europe
Russia
46%
Northern Africa 23% Source: Ernst & Youngs 2009 European
attractiveness survey
Respondents: 809 international business leaders -
Total > 100% many possible answers
for its ability to address the crisis: 70% of respondents are
confident the region has what it takes to overcome the difficulties.India ranks fourth, with 63% of our panel expressing confidence
in the region.
Even North America, where the US is sorely bruised by current
events, is given a favorable rating for its ability to address the
crisis: 69% of those surveyed proclaim their faith in the region's
ability to overcome the current difficulties.
Europe's advanced regime of
"flexicurity" may now be viewed as an
advantage; cushioning the downturn and s
in demand by keeping more people at
work, avoiding home foreclosures, and
providing social security payments to the
jobless. A handicap in times of strong economic growth
has become a regional economic asset in recession - providing
an automatic relative stimulus to consumer spending, as well as
a social and politically stabilizing role.
The remaining BRICs - Russia and Brazil - fare less well in the eyes
of potential investors. Russia's problems stem from an ongoing
crisis in its financial markets, the aftermath of the war in Georgia
and the plummeting price of its crude oil, which in March this
year (2009) was down more than 70% from its July 2008 peak.
Brazil does not suffer from Russia's particular problems, but is notimmune to falling commodity prices and the global meltdown.
2010 outlook
What are business leaders telling us?
In total, 74% of respondents say they are very confident, or fairly
confident in Western Europe's ability to tackle the financial andeconomic meltdown. CEE is also expected to overcome present
difficulties, although potential investors are more reticent about
its capacity to do so. Can East Europeans cope alone? A deep split
is developing in Europe over the extent to which Europe's richer
Western countries should help their poorer Eastern neighbors.
Beleaguered Eastern members fear old Europe is drifting from
the core European Union principle of a single market, and that
this could leave "new Europe" abandoned in its time of need.
China and India are better positioned than
many other developing economies for
a quick recovery towards double-digit
growth. They have relatively small and
insulated financial sectors, high savings
and socially-concentrated wealth. Since becoming full and leading
members of the G20, governments in both countries have
responded with an array of measures. India's central bank has
eased its key lending rate to increase market liquidity, while
tightening monetary policy in other areas to prevent inflation.
China, with its focus on economic growth, has announced several
stimulus policies; the biggest by far being a US $586 billion
package of investment in infrastructure, utilities and housing
over the next two years.
Our survey respondents demonstrate faith in the effectivenessof these policies, with China scoring the second among all regions
The economic policies
of the key global powers
are fundamentally sound
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Reinventing European growth28
Jean-Louis ChaussadeCEO of Suez Environnement.
To save resources, meet the challenge of
demographic growth, and fight climate
change, I have long argued for a circular
economy founded on the use of innovations
that limit the waste of resources and allow
the re-use of materials in the production
cycle.
The re-use of waste water provides an
alternative to capturing water from natural
resources, whilst limiting water shortages.
In the waste arena, material recycling
is already a significant economic activity.
Technology solutions, such as for example,
bottle to bottle plastic recycling, help
directly to protect the planet.
The transition to sustainable models requires
a shift from a volume to a value economy:
to make more with less.
Today, people have realized the importance
of these challenges, and that the present
economic crisis provides an opportunity
to create this new green economy.
Modern technologies, research and
innovation will require colossal investment
to rise to the environmental challenges.
Some countries, such as China and the
United States, whose stimulus plans
put the environment at the heart of their
investment have understood this well.
But financing and political will are crucial
to this battle, and it is essential that Europe
and other developed and even developing
countries move strongly in this direction.
Today in Europe we are well equipped for
this global race to the new economy:
the competitiveness clusters are real
motors for R&D and French and European
companies have unquestioned expertise
and global reach, positioning them well
in many markets.
Inventinggreen
growthBut we must be careful not to let the crisis
slow these trends: we must continue to
innovate, internationalize, take calculatedrisks and throw ourselves wholeheartedly
into the global competition.
Inventing a sustainable post crisis society
is the only option for the good of the
environment but also, I believe, a strategic
turning-point for Europe. If Europe wants
to stay in the race, it and its companies
must make this a strategic priority.
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Ernst & Youngs 2009 European attractiveness survey 29
Driving blind
When interviewed about Europe's future growth drivers, the first
response of our global panel was ... a non-response. Forty per cent
were unable to mention any opportunity for growth in the crisis
context and a quarter declined to identify the most promising
business sectors. However:
Europe's telecoms industry - notably in equipment - is viewedas a growth driver (the most mentioned sector, by 16%).
Our panel believes that key telecoms players will lead recovery
despite big industry challenges around growth, convergence,
business transformation, technological change and increased
regulation2.
Consumer products manufacturers are also expectedto help pull Europe out of the crisis (14%).To succeed anew
in the global market place, they will have to woo back skepticalconsumers, cut costs, sensibly tackle climate change, optimize
their supply chain and manage volatility in commodity and
energy prices. This may affect their FDI potential as well.
The top five sectors to help Europes recovery
0% 5% 10% 15% 20% 25%
25%Can't say
16%Telecommunication
equipment
14%
13%Energy
and environment
Banking, Finance,Insurance
Consumer goods
13%
Real estate,Construction 10%
Source: Ernst & Youngs 2009 European attractiveness survey
Respondents: 809 international business leaders
Total > 100% many possible answers
Climate change and sustainability are no longer corporateluxuries: 13% of our panel thinks that Europe may benefit
from leading-edge technologies in renewable energy and
environmental solutions. In a recent study by Ernst & Young,
90% of our largest clients say they are now undertaking
climate-change related initiatives: investing in green-tech,
alternative energy and sustainable projects, or developing
green products and services to meet consumer demand.
The finance industry: 13% of respondents said that therewill be no recovery without credit to fuel corporate development,
regulatory changes and increased certainty about asset
valuations.
As for real estate: panelists believe stabilization and liquidityare prerequisites for a return to growth.
2. From Industry 360: The Ernst & Young source for global industry insights(2009).
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Reinventing European growth30
Most attractive regions over the next 3 years
0% 10% 20% 30% 40% 50% 60%
China
52%Central and
Eastern Europe
51%
India 48%
Russia 41%
Brazil
40%
39%
Western Europe
38%South-eastern
Europe
37%Northern America
31%
Northern Africa
Japan
Middle East
25%
31%
Oceania 23%
Source: Ernst & Youngs 2009 European attractiveness survey
Respondents: 809 international business leaders
Total > 100% many possible answers
Longer term
Looking East
The economic downturn is unlikely to stop the global center
of economic gravity moving east. Europe is considered - byrisk-averse investors - to be the most attractive business location
today, and ranks ahead of China in its perceived ability
to overcome the economic crisis. Business decision-makers
however believe the post-crisis world will see the eastward
shift continue.
Companies from developed economies will continue to expand
in emerging markets to grow their business, improve their coststructure and/or tap skilled labor pools. Evidence from earlier
recessions has shown that the majority of companies respond
with 'sensible' caution. However, those that later emerged
strongest had clearly identified opportunities to sustain
development during the downturn and had taken strategic
decisions that subsequently distinguished them from
competitors.
Because Western economies are shrinking, the growth of
the BRICs compared with developed economies is faster than
ever. While future generations of Westerners repay money
borrowed for stimulus packages, Eastern economies will be able
to spread the burden across enlarged economies, delivering
growing tax revenues. A prolonged recession, or a slow recovery
in the developed economies, will accelerate the eastward shift
of economic power.
Companies from developed
economies will continue to expand
in emerging markets to grow
their business
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There is no such entity as the seamless
global economy with clear hierarchies.
The reality is a vast number of highly
particular global circuits. Some are
specialized, others not; some are worldwide,
others regional.
In my research on global cities, a first step
is always to identify the specific globalcircuits on which a city is located. This
often brings out particular and important
specialized differences.
For instance, Mumbai is today on a global
circuit for real estate development
investment, whilst a US steel factory
seeking specialized financial or corporate
services to go global would turn to Chicago,
not New York.
There is less competition among cities
and more of a global/regional division of
functions than is commonly recognized.
A second major trend is the shift to a multi-
polar world. European and Asian cities
have gained ground in the global economy:
US cities have lost ground.
Europe has a far more distributed geography
of advantages than we see in Asia or the US.
Europes smaller cities have emerged as
far more significant players in the global
economy. Two decades of expanded
globalization has seen sharp growth inthe number of major and minor global
cities. Copenhagen, say, has emerged as
a sort of global platform a Dubai in Europe.
Meantime, older zones of influence have
strengthened; witness Madrids major
investments in Latin America.
Finally, an urban economy needs to be
highly diversified, to prevent the virus
of a crisis spreading. So continental
European cities have a big advantage,
because financialization is far lower than
in the UK, the US, or such city-statesas Dubai.
Ernst & Youngs 2009 European attractiveness survey 31
Saskia SassenProfessor of sociology at Columbia University.
Author of The Global City (2001) and Territory,Authority, Rights (2008).
Inventingspecializedgrowth
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Reinventing European growth32
Juan Ignacio VidarteDirector General Guggenheim Museum Bilbao, Chief Officerfor Global Strategies, Solomon R. Guggenheim Foundation.
Bilbao is the perfect example of the way
culture and cultural infrastructures can be
effective tools in urban regeneration.
The Guggenheim Museum Bilbao project
was launched in 1992 in the midst of
a profound economic crisis, very high
unemployment, and some skepticism.
Today, one million people per year visitthe Museum, two-thirds from abroad. The
transformation into a more cosmopolitan,
internationally-oriented city fostered by
the Museum has also had a major
economic impact.
Urban transformation means new walkways,
bridges, apartments, services - restaurants,
hotels, transportation, shops - boosted by
public and private investment: a level
of activity that did not exist before.
Such transformation is only possible within
a coherent plan, which here was designed
by the region, the city, and private
partnership the Solomon R. Guggenheim
Foundation. The resulting project reunites
public and private participation at its roots,
management, and operation. But success
must be built on high quality content.
The Guggenheim Museum Bilbao is
an outstanding international institution
offering an original experience based on
an Art Program that combines presentations
from the Collection - shared between
all Guggenheim museums - with temporary
exhibitions capable of stimulating visits.
Since 1997, the Museum has featured
102 exhibitions, some of them in leading
positions in the rankings of most visited
shows worldwide.
Change was necessary, but change is very
difficult. Transformation demands resources
as well as ambition; it requires long-term
leadership, and consensus.
Last, but not least, is the contribution
to the recovery of part of the citys self-esteem and confidence, which makes us
keep working on other transformations.
Inventingculturalgrowth
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Ernst & Youngs 2009 European attractiveness survey 33
Urban attraction
At a local level, investors clearly have greater confidence
in the ability of cities with international qualities - or global cities -
to emerge from the current situation than in the recovery
capacity of their second-tier rivals. Despite current difficulties,
London and New York are seen as the clear leaders with
the capacity to rebound from the crisis. These global cities
have become clusters of education, entrepreneurship and
opportunities, drawing the most able talent from around
the world.
The primacy of long-established centers
in the developed world - including
Europes capitals - is being challenged
by emerging Asian cities such as
Shanghai and Bangalore and by
regional cities acquiring international expertise. Investors nowhave confidence in the innovation capacity of global cities
in high-growth economies. When asked where the next Google
or Microsoft will emerge, Shanghai and Mumbai are seen as
more credible alternatives than US innovation leaders New York
and Silicon Valley, or London's global financial center.
The new Google or Microsoftis more likely to emerge from...
0% 10%
Shangai 8%
Mumbai 7%
Greater London 6%
San Francisco/Silicon Valley
6%
New York
5%
6%
Beijing
4%New Delhi
3%Tokyo
2%Chicago
2%Los Angeles/
California
2%
Paris
Berlin
Bangalore
2%
2%
Boston 2%
2%Moscow
5%
Source: Ernst & Youngs 2009 European attractiveness survey
Respondents : 809 international business leaders
Total > 100% many possible answers
Global cities that have the best abilityto rebound in a crisis context
0% 10% 20% 30%
Greater
London28%
New York 27%
Paris
13%
14%
Shangai
11%Berlin
8%Tokyo
6%Beijing
5%Moscow
4%
Hong Kong
Munich
Frankfurt
3%
4%
Singapore 3%
Source: Ernst & Youngs 2009 European attractiveness surveyRespondents: 809 international business leaders
Total > 100% many possible answers
Regional cities with international characteristics offer lower
operational costs to international investors, less-clogged transport
and logistics networks, easier access to local business networks
and a more stable workforce. As demographics mean that there
are increasing numbers of cities with populations of more than
a million, these secondary centers acquire many of the virtues
of the global centers with fewer inconveniences.
It may be that newer, expanding cities, which
are still building their essential infrastructure
and developing 21st century lifestyles, have
more latitude to experiment, providing more
fertile ground for innovation in sustainable
growth industries.
Global cities have become
centers of education,
entrepreneurship, job
opportunities and talent
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Europe's new
business model:
inventing growth
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It is clear that Europe will not remain a winner without reinventing its growthstrategy. The current period sees global players - including Europe - jostlingto be tomorrow's front runners. Europe may continue to draw on its historicand established strengths - demographics, stability, productivity, and consumerdemand. But a new business model must ultimately be found. In this section,we suggest key challenges for Europe's attractiveness and competitiveness.
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Reinventing European growth36
Reformswanted
Top 5 actions expected from European governmentsto stimulate growth
0% 5% 10% 15%
15%Reform the financial
system
12%
11%Invest in major
infrastructure projects
Grant loan guaranteesto businesses
Lower socialsecurity & other taxes
10%
Support innovative
industries 10%
Source: Ernst & Youngs 2009 European attractiveness survey
Respondents: 809 international business leaders
Total > 100% many possible answers
When asked about government initiatives to stimulate growth,
investors are clearly divided between quick fix, "shovel ready"
measures and longer-term strategic initiatives. Short-term
initiatives include reforming the financial system (today's top
priority, cited by 15%) and lowering taxes (lower payroll charges
12%, lower consumer taxes 9%). Longer-term measures turn to
investment in infrastructure (11%).
Our 809 respondents are calling for a sweeping reorganization of
Europe's economy, a radical transformation of its most matureindustries - those most affected by the crisis, and those most
to blame for contributing to climate change. They are sensitive
to a revision of strategic investments at European and national
levels, but even more sensitive to the power of entrepreneurship.
They note the failure of models arising from the previous
industrial revolutions, which the crisis has clearly underscored.
Would be investors favor diverse
stimulus measures
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Ernst & Youngs 2009 European attractiveness survey 37
Sailing around the world non-stop single-
handed in the Vende Globe is really
a team effort. Im the skipper, but if the boat
is well-prepared, and everything is well-
tested, you can get more sleep, you know
when to take a reef out.
Building a team is not necessarily about
having the very best people for each job,
but having a group that communicates well
to solve problems. Whenever I talk to people
in business they tell me the same dynamic
is at work.
Competitive sailing is the flagship of
a marine industry that creates wealth and
jobs. My degree is in engineering.
My ambition is to have a budget sufficient
that I can really work on innovation, both in
performance and comfort. In my experience,
more comfort leads to greater performance,
so its ultimately the same thing.
There are big challenges in yacht racing
around design and materials, and especially
electricity supply and electronics issues
that arise on leisure yachts, ships, in hydro-
generation in rivers and on land.
On the Vende Globe I took a trailed hydro-
generator, which worked well, but caused
lots of drag. Id love to be able to work with
the manufacturer to improve it. We work
with programmers of navigation systems
and autopilots. Making electronic devices
easier to use is a huge challenge, and this
applies to all digital gadgets.
But innovation takes investment. I need
8m to build a new boat and prepare
to win the 2012 Vende Globe. Sponsors,
like other innovation investors, get great
returns, but need the vision and resources
to take a long-term view.
Samantha DaviesThird to cross the finishing line
in the Vende Globe round the world yacht race
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I wonder whether the economic crisis isnt
a great opportunity for innovation.
The UK is probably ahead of much of Europe
in developing mechanisms and the necessary
infrastructure to turn ideas into products,
but a lot of progress has been made across
the continent.
Our company, which seeks to identify
promising ideas on the laboratory bench in
universities and companies; provide
management, financial, or marketing skills
that may be lacking; and obtain or supply
early-stage funding, is still unusual.
But it works. Among our portfolio of start-
ups are companies developing treatments
for cancer and obesity, designing fuel-cell
household boilers that also generate power,
and perfecting innovative light-weight drives
for electric vehicles.
Our start-ups have created 1,000 jobs.
But beyond those, an infrastructure of
support has developed, in the UK at least,
of experienced start-up managers, as well
as patent agents and lawyers, accountants,
tax advisors and market research firms
expert in supporting start-ups. They are
also learning to work on the basis that
their upside comes from the success
of these ideas.
In Europe, our technology strengths arent
necessarily in IT, but in medicine and life
sciences, engineering, and clean tech.
We have the ideas, the skills, the
infrastructure and the talent. But the
economic crisis has made venture
capitalists more cautious. We have to
recognize that proof-of-concept funding
must take the form of grant aid. Then we
have to solve the challenge of early-stage
funding.
The more and the faster we invest in start-
ups with proven technologies, the faster
they can grow, exploit their market
opportunities, and create jobs in the
process.
Reinventing European growth38
Susan SearleCEO of Imperial Innovations, a quoted technology companyestablished by Imperial College, London, UK
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growth
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Creativity depends heavily
upon a company's ability
to manage an innovation culture
Ernst & Youngs 2009 European attractiveness survey 39
The promotion of innovation and measures in support of innovation
are now at the very top of investors' priorities. Business decision-
makers were asked to put the financial crisis to one side and
reflect on the primary reforms necessary to enhance Europe's
status on the international stage. Today's brutal reality check
seems to have changed people's vision of Europe, with an
associated shift in priorities.
A quarter of respondents make a direct connection between
Europes attractiveness and the improvement of education in
innovation-intensive sectors. The global battle for competitiveness
and mastery of the knowledge economy is growing. Demand for
skills is increasing. The world's brightest students are drawn tothe world's best universities, and often stay on after graduation.
Our panel strongly affirms (11%) that Europes entrepreneurial
fabric will be made of start-ups and corporate spin-offs in
innovation hot-spots.
Reforms to make Europe a real leader in international competitiveness and attractiveness
0% 5% 10% 15% 20% 25% 30%
To establish tax incentive for innovative companies
25%
27%
To improve education and training in new technologies
13%To promote the introduction of European innovation
12%To develop joint research programs at a European level
11%To develop entrepreneurship
11%To promote corporate accountability
10%
10%To direct secondary and post-secondary education to focus on
economic needs and innovation
To develop venture capital and other financial tools
To develop the international transport infrastructure
9%
Can't say 26%
Source: Ernst & Youngs 2009 European attractiveness survey
Respondents: 809 international business leaders
Total > 100% many possible answers
Creative(r)evolution
Former issues of labor market flexibility and gripes about
impediments to business in Europe - high social charges in
Germany and restrictive work hours in France - have paled in
significance. Only 2% of respondents now seek more labor
law flexibility, compared with 42% in 2008.
Many businesses have adopted disruptive technologies to improve
productivity, develop new products and services and/or create
new business models - transforming major industries. Our global
panel believes this is the model for Europe's future growth.
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Reinventing European growth40
Europe'scity-zen
Europe's future will spring from the knowledge and intelligence
assembled in its cities. In March, the European Economic and Social
Council released recommendations for balanced and sustainable
urban development, and identified challenges and opportunities.
Urban development is a powerful global trend. The world's cities
are adding 200,000 citizens a year, and by 2030, 60 or 80%
of the world's population will be urban. Cities are increasingly
where wealth creation and origination of products and services
happens. Already, 75% of global added-value is produced in
cities and their inhabitants generate 9 out of 10 innovations.
National capitals can no longer be complacent in their primacy.
Globalization has brought global rivalry, for investment and talent
not only between capitals, but also with second-tier cities
with economic specializations that give them global clout.
The development of cities is both a challenge and an opportunity.
City growth and redevelopment provides
multiple markets for business, and
opportunities for innovation in transport,
housing, education, security, culture,
sustainability and services.
European cities are a key attractiveness
asset. Some of their merits are hard or expensive to imitate.
Our panel is seduced by their exceptional culture and history
(27% of respondents), effective international accessibility (26%)
and unique lifestyle (25%). But faced with blossoming cities
in the east and elsewhere, Europe's cities cannot rest on their
heritage and park benches. They must accommodate growing,
increasingly cosmopolitan populations, modernize their
accommodation and infrastructure, and become centers
of innovation and ideas.
European cities are
a key attractiveness asset.
Some of their merits are
hard or expensive to imitate
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Ernst & Youngs 2009 European attractiveness survey 41
To encourage invention and , we have to
think about the quality of life.
Ask yourself: where do I want to live? How
do I want to live? What makes me happy?
Today, we are living in cities that have
scarcely changed since the invention of
the car. It is time to turn the page.
We need new neighborhoods where people
can combine their personal life, social life
and working life without car-filled streets,
without wasting hours traveling each day.
Time is life.
To achieve better buildings and better
cities, there are five pre-conditions. First,
a building should be sound economically.
Remember that the beauty of Florence,
where I live, arose because of the Medici
family who were successful bankers.
If it is economically viable, the next mostimportant criterion is functionality: it is
the space inside, where people spend
their lives, that is most important.
Of course, today a building, a neighborhood,
also has to be environmentally sound.
Then there is the engineering: it must be
waterproof, soundproof, and economical
to maintain. Finally, and only then, you
have to think about the appearance. Too
many buildings are beautiful, but inefficient.
To achieve this, the future of constructionlies in prefabrication, which I will use for
my Dynamic Tower. We should make buildings
in factories, as we do cars, and assemble
them on site. They would be cheaper,
easier to repair, and have flexible space.
If more people can live in better homes and
better cities, they will be happier, and have
more time to be inventive in ways that will
help others.
My belief is that whatever is correct is
beautiful: beautiful is not always correct.
Cities of the future can be beautiful, but first
of all they should offer good quality of life.
Dr David FisherFounder Dynamic Architecture, Italy
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Reinventing European growth42
Entrepreneurialand responsible
government
Governments are center-stage, amid tightening regulation
and support for strategic industries. State capitalism, common
in emerging countries (where around one-fifth of the largest
companies are state-owned) is making a comeback in the western
financial sector, reversing decades of European business
privatization. The bail-out of banks across Europe and the US
on an unprecedented scale has put government at the heart of
finance and shattered self-regulation, calling free-market
thinking into question.
Most governments are reluctant investors. They see their new-found role as temporary. But the lesson of past banking crises,
in Scandinavia and elsewhere, is that subsequent withdrawal
by the state is a long and complex process. This puts even more
pressure on governments, which are now being
asked to clear away the private sector car crash,
then provide the fuel and the GPS for a route
back to economic growth.
The first principle of responsible government
is that it must not retrench into protectionism
in Europe or anywhere else. Whatever the appeal
of trying to protect national jobs, the globalization of business
has done much to strengthen economies and lift people out of
poverty the world over. Protectionism, if it comes, would surely
slow the recovery and trigger political and market instability.
The second principle is that it is critical for government to be
flexible, yet maintain fiscal responsibility; to have an easily-
identifiable vision of what is efficient for business and make
clear choices about which sectors are truly strategic, resisting
short-tem social and political pressures; and to ensure state
initiatives are measured and assessed by independent third
parties. New interventionist public policies must be akin to
entrepreneurship...government style.
Reforms will be truly effective only if government and business
do more to promote Europe as an agent of globalization.
Europe's economic weight is undervalued (25% of world's GDP,
40% of FDI flows) and its diversity is the unique selling point
for investors.
The bail-out of banks
across Europe
has put government
at the heart of finance
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Reinventing European growth44
8%
44%
Western Europe
3%
32%
Northern Europe
Central & Eastern Europe
Northern America
Asia
12%
The Ernst & Young's 2009 European
attractiveness survey is based on
a twofold, original methodology
that reflects:
The real attractiveness of Europe
for foreign investors. Our evaluation ofthe reality of FDI in Europe is based on
Ernst & Young's European Investment
Monitor (EIM). This database tracks
FDI projects that have resulted in new
facilities and/or the creation of new
jobs. By excluding portfolio investments,
mergers and acquisitions, it shows the
reality of investment in manufacturing
or services operations by foreign
companies across the continent.
The perceived attractiveness of
Europe and its competitors by foreigninvestors. We define the attractiveness
of a location as a combination of image,
investors' confidence and the perception
of a country or area's ability to provide
the most competitive benefits for FDI.
The field research was conducted by
Institut CSA in February and March
2009, via telephone interviews,
based on a representative panel of
809 international decision-makers.
The real attractiveness of Europe
Data is widely available on FDI. An
investment in a company is normally
included if the foreign investor has more
than 10% of its equity and a voice in its
management. FDI includes equity capital,reinvested earnings and intracompany
loans. But many analysts are more
interested in evaluating investment
in physical assets, such as plant and
equipment, in a foreign country. These
figures, rarely recorded by institutional
sources, provide invaluable insights as
to how inward investment projects are
undertaken, in which activities, by whom
and, of course, where. To map these
real investments carried out in Europe,
Ernst and Young created the Ernst &Young EIM in 1997. The EIM is a leading
online information provider tracking
inward investment across Europe.
This flagship business information tool
from Ernst & Young is a detailed source
of information on cross-border investment
projects and trends throughout Europe.
The EIM is a tool frequently used by
government and private sector
organizations/corporations wishing
to identify trends, significant movements
in jobs and industries, business and
investment.
Nationality of the companies surveyed
Methodology
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38%
41%
Less than 150 Million Euros
21%
From 150 Million Euros
to 1,5 Billion Euros
More than 1,5 Billion Euros
Size of the companies surveyed
8%
20%
Private & business services
39%
24%
Chemical & Pharmaceutical Industries
Industry, Automative, Energy
Consumer
High-tech & telecommunicationinfrastructure and equipment
Other
8%1%
Sector of activity of the companies surveyed
The Ernst & Young European Investment
Monitor, researched and powered by
Oxford Intelligence, is a highly detailed
source of cross-border investment projects
and trends in Europe, dating back to 1997.
The database focuses on investment
announcements, the number of newjobs created and, where identifiable,
the associated capital investment, thus
providing exhaustive data on FDI in
Europe. It allows users to monitor trends,
movements in jobs and industries, and
identify emerging sectors and cluster
development. Projects are identified
through the daily monitoring and research
of more than 10,000 news sources. The
research team aims to contact directly
70% of the companies undertaking the
investment for direct validation purposes.This process of direct verification with
the investing company ensures that real
investment data is accurately reflected.
The employment figures collected by
the research team reflect the number of
new jobs created at the start-up date of
operations, as communicated by
the companies during our follow-up
interview. In some cases, the only figures
that a company can confirm are the total
employment numbers over the life of
the project. This is carefully noted so that
any subsequent job creation from later
phases of the project can be cross-checked
and not double-counted in later years.
The following categories of investment
projects are excluded from EIM:
Mergers and acquisitions or joint
ventures (unless these result in newfacilities, new jobs created)
License agreements Retail and leisure facilities, hotels and
real estate investments
Utility facilities includingtelecommunications networks, airports,
ports or other fixed infrastructure
investments
Extraction activities (ores, minerals orfuels)
Portfolio investments (i.e. pensions,
insurance and financial funds) Factory/production replacementinvestments (e.g. a new machine
replacing an old one, but not creating
any new employment)
Not-for-profit organizations(e.g. charitable foundations, trade
associations, governmental bodies)
The perceived attractiveness of
Europe and its competitors
The survey was conducted with an
international panel of corporate leaders
of all origins, with clear views and
experience of Europe:
57% European businesses 32% North American businesses 12% Asian and other businesses
Of the non-European compan